Canada’s free ride on U.S. drug development may end soon

A shift in U.S. drug pricing could cut pharmaceutical profits, meaning less money for research and development

By Steven Globerman
and Bacchus Barua
The Fraser Institute

In October, the administration of U.S. President Donald Trump outlined a plan that, if implemented, would substantially lower the amount the U.S. government will pay drug-makers for certain pharmaceuticals covered by its Medicare plan.

Steven Globerman

Though limited in scope, Trump’s changes are a clear step toward controlling domestic drug prices while taking a swipe at what he calls “foreign freeloaders” – other countries he says benefit from U.S. innovation without paying their share of the full costs associated with developing new drugs.

This is a problem for Canadians because we’re one of the freeloading countries.

Health Canada uses a reference-pricing system to establish maximum prices that drug manufacturers can charge here. The government uses prices paid for specific drugs in certain developed countries (including France, the United Kingdom and Italy) to identify an average price that sets an upper-limit for the price in Canada.

Even though Canada’s reference basket also included the United States, which has the highest prices globally, the inclusion of other countries means Canadian drug prices have been well below prices for identical drugs sold in the U.S.

Bacchus Barua

In a bid to get even steeper discounts, Health Canada recently proposed changes to our reference-pricing system, including to drop the two countries with the highest prices (the U.S. and Switzerland) from the set of countries used to calculate international reference prices. That will result in lower average prices and even greater disparities in drug prices between the U.S. and Canada.

Though such policies have delayed access to newer medications, overall, this strategy has enabled many countries – including Canada – to ride the coattails of American pharmaceutical innovation by paying less than its proportionate share of the costs of research and development.

The U.S. administration’s new plan includes several initiatives meant to reduce expenditures on drugs provided under Medicare Part B program. Although this federal program only covers drugs used by physicians for inpatient treatments in hospitals and clinics, Trump’s plan to use international reference-pricing similar to Canada’s price-control strategy represents a significant shift in U.S. pharmaceutical policy. The prices paid by Medicare to private-sector drug vendors would be based on the average prices paid by a group of 16 other countries, including Canada.

Since U.S. drug prices, particularly for relatively new biologic drugs, are substantially higher than prices in other developed countries, the U.S. hopes reference-pricing will reduce U.S. prices to be more on par with prices paid by national health authorities in other developed countries.

While some may welcome this news, it’s important to remember that U.S. pharmaceutical companies do the majority of the world’s new drug development, and this change will likely reduce their revenues and profits.

This, in turn, will discourage research and development activities by U.S. companies and prevent – or at least delay – the introduction of innovative drug therapies into national health-care systems around the world, including Canada’s.

The gamesmanship in selecting references for domestic pricing of drugs highlights the incentives for national health-care systems to free ride on the expenditures of other national systems, especially that of the U.S.

However, the free ride that Canada and other countries have enjoyed courtesy of the drug companies – or more accurately, their profits earned on U.S. sales – may soon end. If it does, Canadian patients and those in other countries will be deprived of new and potentially life-saving drugs.

This problem demands a globally co-ordinated solution. Canada’s government should take the lead, given its commitment to international co-operation to solve global common problems.

One possible approach is an international agreement that limits the degree individual national health-care systems can set maximum prices below prices in the highest reference-pricing country.

Ultimately it’s in the best interest of all patients, including Canadians, to ensure governments provide incentives for innovation and help new treatments and cures reach those who need them.